Question 1

An investment should be made in period 0 if:

Accepted Answer

A)  desired consumption in period 0 is less than income. 
B)  desired consumption in period 1 is greater than income. 
C)  return on the investment is greater than the interest rate. 
D)  return on the investment is less than the interest rate.

Question 2

The separation theorem in financial markets is fundamental to allowing managers to maximize all shareholders wealth.Explain the separation theorem and how the financial markets provide for all different types of investors.

Accepted Answer

The answer of The separation theorem in financial markets is...

Question 3

The present value of future cash flows minus initial cost is called:

Accepted Answer

A)  the future value of the project. 
B)  the net present value of the project. 
C)  the equivalent sum of the investment. 
D)  the initial investment risk equivalent value.

Question 4

Graph and explain the investment choice the corporation should make.(Hint: Determine the NPV.)

Accepted Answer

The answer of Graph and explain the investment choice the...

Question 5

A lender with no investment opportunities has equal income in period 0 and in period 1.Which of the following correctly describes the consequence of an increase in the interest rate?

Accepted Answer

A)  Consumption in period 0 stays the same while consumption in period 1 decreases. 
B)  Consumption in period 0 stays the same while consumption in period 1 increases. 
C)  Consumption in period 0 increases while consumption in period 1 decreases. 
D)  Consumption in period 0 decreases while consumption in period 1 stays the same.

Question 6

An individual has income of $35,000 in period 0 and $40,000 in period 1.An investment opportunity that costs $10,000 in period 0 is worth $11,000 in period 1.What is the maximum possible consumption in period 0 if the individual consumes $50,000 in period 1 when the market rate of interest is 8%?

Accepted Answer

A)  $26,000 
B)  $26,667 
C)  $44,000 
D)  $44,720

Question 7

If the market interest rate is 11%,what is the optimal investment? What is maximum consumption in period 1 if the individual takes on the optimal set of investment projects and consumes all other period 0 income?
D.
Period 1 consumption is $2,400 + $910 = $3,310

Accepted Answer

The answer of If the market interest rate is 11%,what...

Question 8

Corporate managers can maximize shareholder wealth by choosing positive NPV projects because:

Accepted Answer

A)  all investors have the same preferences. 
B)  the unhappy shareholders can sell off shares. 
C)  the separation theorem in financial markets states that all investors will be satisfied with the same investment decision regardless of personal preferences. 
D)  managers are wiser than shareholders regarding investments.

Question 9

If the corporation had cash on hand of $25,000 before raising any capital for the investment and the financial market rate is 9%.How much will the current shareholders earn.?

Accepted Answer

The answer of If the corporation had cash on hand...

Question 10

One of the functions of financial intermediaries is to make sure the market clears.This means:

Accepted Answer

A)  setting the appropriate interest rates. 
B)  recording the parties to the transactions. 
C)  making sure the total amount to be lent equals the total amount to be borrowed. 
D)  minimizing the spread between rates.

Question 11

Suppose that the market interest rate falls to 5%.What is the maximum possible consumption in period 1 if the individual takes on the optimal set of investment projects?
D.
Period 1 consumption is $1,620 + $2,400 + $910 = $4,930

Accepted Answer

The answer of Suppose that the market interest rate falls...

Question 12

The ray that connects the maximum one can consume in Year 0 with the maximum one can consume in Year 1 represents:

Accepted Answer

A)  all the investment possibilities and has a slope equal to (1 + r). 
B)  all best consumption alternatives and has a slope equal to -(1 + r). 
C)  all the savings choices and has a slope equal to 1. 
D)  all the best consumption choices and has a slope equal to 1.

Question 13

Shareholders of corporations generally do not vote on every investment decision but depend on managers to maximize value by:

Accepted Answer

A)  choosing the highest net income projects. 
B)  investing at the market rate of return. 
C)  buying shares back from investors. 
D)  following the NPV rule to choose investments.

Question 14

If the corporation had cash on hand of $25,000 before raising any capital for the investment and the financial market rate is 9%.Graph and explain the investment choice the corporation should make.(Hint: Determine the NPV.)

Accepted Answer